MKS Instruments Inc (MKSI) Q4 2020 Earnings Call Transcript

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MKS Instruments Inc (MKSI 1.40%)
Q4 2020 Earnings Call
Jan 28, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MKS Instruments Fourth Quarter and Full Year 2020 Earnings Call. [Operator Instructions]

I would now like to introduce the host of today's conference call, Mr. David Ryzhik. You may begin.

David Ryzhik -- Vice President of Investor Relations

Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations. And I'm joined this morning by John Lee, President and Chief Executive Officer, and Seth Bagshaw, Senior Vice President and Chief Financial Officer.

Yesterday, after market close, we released our financial results for the fourth quarter and full year 2020, which are posted to our website, mksinst.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in the most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q for the Company. These statements represent the Company's expectations only as of today and should not be relied upon as represented in the Company's estimates or views as of any date subsequent to today, and the Company disclaims any obligation to update these statements.

During the call, we will be discussing non-GAAP financial measures. Please refer to our press release for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures.

Now I'll turn the call over to John.

John T. C. Lee -- President and Chief Executive Officer

Thanks, David. Good morning, everyone, and thank you for joining us today. Before we discuss our quarterly results and current market trends, I want to take a moment to reflect on the past year. 2020 was full of challenges for all of us, both personally and professionally. But for MKS, I can best characterize 2020 with the following three words: resilience, opportunity and growth.

Let me start with resilience. Our foremost priority when the COVID-19 pandemic started was the safety and well-being of our global workforce, and it continues to be our top priority. We responded quickly at the onset of the pandemic and implemented a number of safety precautions for our employees, while also shifting to a work-from-home environment for a significant portion of our workforce. We also remained steadfast in delivering on the needs of our customers during this challenging time. Our team worked tirelessly to ensure continuity of operations by swiftly responding to disruptions at our factories and supply chain partners, while adhering to stringent safety protocols.

Now let me discuss what I mean by opportunity. Disruptions we faced did not interrupt our cadence of innovation and this allowed us to take advantage of new opportunities in the markets we serve. In 2020, we were awarded 170 new patents. We also grew new product releases by 48% year-over-year and secured a number of important design wins for both our Semiconductor and Advanced Markets. And I am pleased to announce for the second year in a row that we are a finalist for an SPIE Prism Award, this time for our Ophir Beam Splitter for high-power lasers. But we also view opportunity through another lens: employee development, diversity, equity and inclusion. In 2020, we developed new leadership programs and rolled out a new diversity training program for over 120 of our top leaders. We also embarked on several other initiatives to drive greater diversity in hiring, and we are already seeing these results.

And finally, let me discuss what I mean by growth. In 2020, we grew revenue by 23%. In particular, we grew our Semiconductor revenue by 49% year-over-year. Non-GAAP EPS and free cash flow grew by 64% and 137% year-over-year, respectively.

Now let's discuss our fourth quarter results in more detail. We delivered revenue of $660 million and non-GAAP net earnings per diluted share of $2.34, both above the high end of our guidance range and both quarterly records. Sales for our Semiconductor Market further strengthened in the fourth quarter, growing 9% sequentially and 45% year-over-year. As we discussed at our Analyst Day last month, our industry-leading portfolio of critical subsystems has allowed us to gain insights into market inflections to drive new areas of innovation that accelerate our customers' roadmaps. This is culminated into a sustainable competitive advantage, enabling us to outperform WFE organically by 200 basis points over the past decade.

During the past several quarters, we've discussed the strong demand for our Power Solutions products, and the fourth quarter was no exception as revenue reached another record. We continue to lead in dielectric etch applications and remain focused on leveraging our unique capabilities to capture share in conductor etch, as well as new opportunities in deposition. But our Power Solutions business was just one component of our strong fourth quarter results, as we achieved robust sequential and year-over-year growth across the remainder of our Semiconductor portfolio.

In our Pressure business, we benefited from strong demand across a wide range of applications, and we continue to execute on design wins with multiple OEMs. The superior performance of our capacitance manometers in advanced applications requiring heated pressure measurement has been a key advantage. We are encouraged with the strength we saw in our Valves business and our plasma and reactive gas portfolio delivered strong sequential growth in the fourth quarter. We continue to see healthy design win activity for our dissolved ozone and dissolved ammonia systems in wet clean applications with particular strength in leading edge foundry customers.

As we look ahead to the first quarter of 2021, we expect revenue in our Semiconductor Market to be consistent to slightly down when compared to our outstanding fourth quarter levels. Demand trends remain strong and we expect to deliver a robust year-over-year growth in the first quarter of 2020.

In our Advanced Markets, we delivered record fourth quarter revenue, growing 16% sequentially and 17% year-over-year, marking a return to year-over-year organic growth for the first time since the third quarter of 2018. Our strong results were underpinned by a sequential improvement in our research market, and more notably, an acceleration in demand from advanced electronics manufacturing. As we highlighted at our Analyst Day, we expect advanced electronics manufacturing to be a key growth driver for our Advanced Markets over the long term.

The secular trends of mineralization, complexity and new materials are driving the need for precision laser processing in PCB, solar, display and electronic component manufacturing where we are uniquely positioned with our Surround the Workpiece offering of lasers, optics, photonics, motion and systems solutions. We saw strong demand for our flex PCB via drilling systems in the fourth quarter, which is typically a seasonal trough. As we've indicated in our prior calls, we benefit not just from capacity additions, but also from our customers' transitions to new flex PCB designs where our state-of-the-art CapStone tool is a key enabler.

In addition, we have seen an improvement in demand for our multi-layer ceramic capacitor test systems where we are leading provider to the MLCC manufacturing ecosystem. We are also very encouraged with the market adoption of our high density interconnect via drilling tool. And as we announced last month, we received our second multi-unit order for high volume manufacturing, this one from an important HDI PCB manufacturer in Taiwan. We remain focused on executing on our playbook of converting beta systems to design wins.

Needless to say, I am very pleased with how our Equipment & Solutions division exited 2020, which capped off a year marked by strong revenue growth and considerable progress in our strategy to capture share in the sizable HDI PCB market, and we are entering 2021 with strong momentum.

In closing, we are encouraged by the continued recovery in our Advanced Markets and we expect revenue in the first quarter to be consistent to slightly up compared to fourth quarter levels, as improving demand trends in advanced electronics are expected to continue into the first quarter. For this reason, we expect to deliver another quarter of strong year-over-year growth in Advanced Markets.

And now, I'd like to turn the call over to Seth.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you, John. I will cover our fourth quarter and full year 2020 results, then provide additional detail and guidance for the first quarter of 2021. Sales for the fourth quarter were a record $660 million, up 12% sequentially, up 32% year-over-year and above the high end of our guidance range. Our performance reflects strong demand in our Semiconductor Market, continued rebound in our Advanced Markets.

In the fourth quarter, Semiconductor sales set another record at $393 million, up 9% sequentially and up 45% year-over-year, reflecting our broad exposure across memory, foundry and logic applications. Our Power Solutions portfolio continues to outperform the underlying power market and we are pleased to report another quarter of record revenue.

As we highlighted at our Analyst Day last month, our advanced control algorithms, modularity and fast development cycles are key differentiators of our Power Solutions. It will continue to create new opportunities to accelerate our customer roadmaps.

For the fourth quarter, sales to Advanced Markets were a record $267 million, up 16% sequentially and up 17% year-over-year, led by strong growth in advanced electronics applications and continued recovery in our research market.

As John said, we saw strong early cycle demand for our flex PCB via drilling systems, driven in large part by both capacity needs in essential technology transitions for 5G smartphones and other devices. We estimate that amount of flexible PCB content in a high-end 5G smartphone is on average 30% higher than compared to a high end 4G phones. Moreover, continuous flexible PCB design changes are driving demand for our leading edge via drilling solutions.

We are also pleased to see a recovery in demand for our MLCC test systems. As a reminder, we offer multiple MLCC test systems solutions in the market, addressing two main categories. The first is ultra small form factor MLCCs, which are mainly used in smartphones and other consumer electronics. And the second, our large chip MLCCs, which are mainly used in automotive and infrastructure applications. We saw strength in both of these categories in the fourth quarter.

We continue to execute our HDI strategy and received our second multi-unit order for Geode HDI system in the fourth quarter. We are very pleased with the increasing market acceptance of our HDI tool and believe this is a validation of our cost of ownership advantage, which includes higher throughput, smaller footprint, lighter weight and improved serviceability.

With regards to our first multi-unit order announced last September, we successfully completed installation and received customer acceptance on all units. These units are now fully deployed in high volume manufacturing.

As highlighted in our Analyst Day last month, our Advanced Electronics story extends beyond PCB solutions, but also encompasses solar display electronic component applications and we are encouraged with the demand trends we are seeing in all these applications. For the quarter, the revenue split between our Semiconductor and Advanced Markets was 60% and 40%, respectively.

Fourth quarter non-GAAP gross margin was 45.7%, above the midpoint of guidance and up 240 basis points year-over-year.

Non-GAAP operating expenses for the fourth quarter were $138 million and reflects higher variable compensation due to our strong financial performance. Fourth quarter non-GAAP operating margin was 24.7%, a sequential increase of 160 basis points and up 630 basis points year-over-year, reflecting the strong financial leverage in our operating model.

Non-GAAP net interest expense for the fourth quarter was $6 million and our non-GAAP tax rate was approximately 18%.

Non-GAAP net earnings for the fourth quarter were a record $130 million and a record $2.34 per diluted share.

Moving on to full year results, sales were a record $2.3 billion, up 23% year-over-year with Semiconductor sales up 49% to $1.4 billion. 2020 was not only a record year for our Power Solutions business, but excluding Power, the remainder of our combined Semiconductor business also delivered record results. This record performance underscores the increasing importance of our Surround the Chamber strategy and a critical enabling across a number of key technology inflections. In 2020, we believe we outperformed our peers across multiple market segments.

In Advanced Markets, revenue declined slightly over 3%, largely due to COVID-19 related headwinds in the first half of the year, however, recovered strong in the second half of 2020, growing 6% year-over-year. With sequential quarterly growth in the third and fourth quarters, we are starting 2021 with improving demand trends in advanced electronics applications, which are a key driver of long-term growth in our Advanced Markets. The revenue split for the year between our Semiconductor and Advanced Markets was 59% and 41%, respectively.

Non-GAAP gross margin was 45.2%, up from 44.1% in 2019, and non-GAAP operating margin increased 450 basis points to 22.6%.

In 2020, we recorded non-GAAP net earnings of $411 million, or $7.43 per diluted share, which were both up more than 60% from 2019.

Exiting the fourth quarter, we maintained a strong balance sheet and liquidity position, with cash and short-term investments of $836 million and $100 million of incremental borrowing capacity under an asset base line of credit, subject to certain borrowing base requirements. With a term loan principal balance of $833 million, we are pleased to announce that we have exited the fourth quarter in a net cash position less than 24 months of the acquisition of ESI.

In terms of working capital, day sales outstanding were 54 days at the end of the fourth quarter compared to 56 days at the end of the third quarter. Inventory turns were 2.9 times in the fourth quarter compared to 2.6 times in the third quarter.

We remained focused on improving our cash conversion cycle. In fourth quarter, operating cash flow and free cash flow were $147 million and $122 million, respectively. For the year, operating cash flow and free cash flow were $513 million and $428 million, respectively. Both operating and free cash flow were record results and more than doubled from 2019.

Consistent with prior quarters, we had a dividend payment of $11 million, or $0.20 per share.

I will now turn to our first quarter outlook. Based on current business levels, we estimate first quarter 2021 revenue of $650 million, plus or minus $25 million. Based on anticipated product mix and revenue levels, we estimate the first quarter non-GAAP gross margin of 45%, plus or minus 1 percentage point, and non-GAAP operating expenses of $140 million, plus or minus $4 million.

For the first quarter, non-GAAP net interest expense expected to be approximately $6 million and our non-GAAP tax rate expected to be approximately 18%.

Given these assumptions, we expect first quarter non-GAAP net earnings of $2.16 per diluted share, plus or minus $0.20.

I'd like to now turn the call back to the operator for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Jim Ricchiuti with Needham & Company.

James Ricchiuti -- Needham & Company, LLC -- Analyst

Hi. Good morning. Couple of questions on the E&S business. And I'm wondering if there is any way you can elaborate on the strength you saw in the business versus Q3, as it relates to how much of the demand you would attribute to the better smartphone cycle, the type of recovery that you're seeing in the MLCC portion of the business and maybe the extent to which Geode was a contributor in the quarter?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Jim, it's John. I'll take that. Yeah, I think Geode was a contributor, but not a large contributor. So I think, in general, we attribute in both the MLCC and the flex upside in Q4 to a stronger smartphone cycle and a little earlier than is typical. So it's really, we believe, driven mostly by the smartphone market.

James Ricchiuti -- Needham & Company, LLC -- Analyst

Got it. And, John, just -- I wanted to just ask you about -- obviously, it has been a high profile M&A development within the laser photonics market off late. And I'm wondering how you see this impacting MKS from the standpoint of whether this may signal further consolidation in the market, or maybe as it relates to multiples for potential M&A that you may be pursuing in this space?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Jim, well certainly, we've talked about one of our strategies for growth is in M&A, and we've talked about the fact that we have targets both in Advanced Markets, as you know, as well as Semi, there's just more targets in Advanced Markets. So I think the industry does -- the photonics industry does have more room for consolidation. I think that will occur. And as you can imagine we're certainly going to be a participant in that.

James Ricchiuti -- Needham & Company, LLC -- Analyst

Thanks. I'll jump back in the queue.

John T. C. Lee -- President and Chief Executive Officer

Thanks, Jim.

Operator

Our next question comes from Paretosh Misra with Berenberg.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Good morning, guys. Thanks for taking my question. So we've been hearing about the chip shortage, particularly at several automotive producers. So just curious how are you -- how is MKS positioned to help customers to increase volumes? Like, are you seeing any incremental demand because of that shortage?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Paretosh, it's John. I can't say we can put our finger on anything specific with respect to the published shortages in automotive chips. I think we certainly saw a lot of service and spare parts to the older fabs that are the ones building a lot of those kinds of automotive chips. So, I don't think we can really tell if a lot of that's going to the automotive manufacturers.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Got it. And then just as a follow-up on your laser business. So some of the fiber laser producers are seeing increased demand primarily from manufacturing. I'm just curious, are you seeing some of that too? I know you don't have that much exposure to the fiber lasers, mostly pulse side. But just curious, what are you seeing on the demand side?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Broadly, Paretosh, I think we do see industrials, as well as advanced electronics manufacturing increasing. You can see that in our numbers in Q4 and our guidance in Q1. So, we see a little bit of that as well. As you said, we don't make the fiber lasers, but we do make the rest of the Surround the Workpiece, diagnostics that go around it. So, I would say we're seeing something similar to what some of those participants are saying they're seeing in the fiber laser market.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Got it. Thanks, guys.

John T. C. Lee -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Patrick Ho with Stifel.

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Thank you. Congratulations, and a belated Happy New Year. John, maybe first off on the Semiconductor side of things. You've talked about share gains on the Power side -- on the Power and for your Semi business. Can you just discuss maybe some of the emerging opportunities on the optic side, particularly as it relates to litho and process control? Do you expect to outperform the industry growth rates as you gain more share in that segment?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Thanks for the question, Patrick. That's certainly one of our strategic objectives, as we talked about at Analyst Day, and our investments in there with respect to engineering, as well as capex to allow us to address more of the optics market for lithography inspection, as well as outside Semi. And so, we'll see, but it's kind of the playbook of MKS. We see an opportunity, as you know, and we invest in that inflection. And it's a multi-year plan. And we're pretty positive about the opportunity there because our share there is lower than our vacuum chamber type of businesses.

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Great. That's helpful. And maybe as my follow-up question for Seth. You actually delivered long working capital numbers in an environment where logistics and supply chain is tight across the ecosystem. One, how are you looking at the supply chain today? Are you facing any shortages? And two, what are you able to do to maintain these pretty strong working capital numbers despite the high demand, particularly in the Semi side of things?

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. Thank you, Patrick. So I would say on the supply side, we have normal ramp environment, obviously, looking at parts that we work on our supply chain, I'd say it's just typical ramp environment. You're obviously using a few parts, which is quite typical. The operation team, you can see our numbers, they have done just a really fantastic job navigating that in this environment, especially go back when COVID-19 hit in Q1 and Q2. So I put that in kind of normal category and we're managing that pretty well.

In terms of working capital, we mentioned in a couple of calls and like Analyst Day as well, we're really focused on cash conversion. Obviously, we've got a very strong operating model. And then the cash conversion opportunities we're seeing is working down receivables, we did that started back again in early 2020 and maintain that going forward. We'll do the same thing on being more efficient on inventory levels and velocity of turn, so forth. It'll be a bit of a journey for us, because we have a long list of parts. And one of our strength, again, is we really respond quickly to our customer base. So we always have a little bit probably higher than average inventory levels, but we definitely look at that as an opportunity going forward. So it's a holistic approach. Obviously, our operating model is in good shape. We'll continue to drive that improvement over the long-term. And now, cash conversion is a focus for us as well. You're seeing impact obviously this year in the record free cash flow and operating cash result. So we think we do a little better going forward. That's our goal.

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Thank you.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah.

Operator

Our next question comes from Krish Sankar with Cowen.

Stephen -- Cowen & Co. -- Analyst

Hi. This is Stephen [Phonetic], calling on behalf of Krish. John, my first question for you in terms of the Semi business, I'm just wondering if you can just provide some more color on the March quarter guidance for the Semi's business? Any color on the components that driving that would be helpful? And also if you also look a little further out here, just one of the customers last night talked about a front half loaded WFE year, the trends you're seeing are consistent with that or are you seeing other factors that might lead to a differentiation there?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Hi, Stephen. So we are seeing a strong Q1 for sure. And on the guide -- the midpoint of the guide is $650 million, slightly lower than our $660 million that we actually achieved in Q4, but it's really -- Q4 was really quite a record quarter. So we're seeing a very strong Semi quarter in Q1. We don't guide out more than Q1, but I would say, visibility is OK in the first half. And in the second half, I don't think really -- anyone really knows. There's a lot of things that could go, drive it better or worse. So I think we're strongly positive about Semi in Q1, and the first half is looking OK, but we wouldn't want to guide beyond the first quarter.

Stephen -- Cowen & Co. -- Analyst

Okay. Thanks for that, John. And then maybe one quick one for Seth. Just the gross margin guidance, can you talk about that the puts and takes for the high and low-end of the gross margin guidance?

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. Thank you, Stephen. So, we obviously -- our published model is 50% variable gross margin in 2020, we achieved that for sure, and again pretty close in the fourth quarter. The Q1, there is a little bit of a mixed dynamic in there. So the L&M division had a little bit -- we sold products in Q4, we think in Q1 that will be a little bit below the corporate average. So it's probably tick below that 50% flow through if you take the midpoint, but it's really not that far off from the model. And again, we ranged the margin, obviously. So that's kind of the high level takeaway for the quarterly guidance for margin.

The other piece we're managing very well is we do have some headwinds in the COVID world. Obviously, freight cost little higher. We've been very careful on -- within the factory social distancing and making sure that everybody is maintaining the right protocol. So that's kind of affecting a little bit of the efficiencies with kind of in the run rates as well, but the team is managing very well on that. So really that -- take away is just a little bit of mix in the L&M group in Q1. Again we ranged the guidance. So I would kind of be looking at that range as a good thoughtful estimate for us.

Stephen -- Cowen & Co. -- Analyst

Okay. Thanks, and congratulations on the results.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. Thanks, Stephen.

Operator

Our next question comes from Sidney Ho with Deutsche Bank.

Jeffrey Rand -- Deutsche Bank -- Analyst

Hi, this is Jeff Rand on for Sidney. After growing your business, your Semi business, almost 50% in 2020, do you believe this business can still outgrow the overall the WFE market in 2021, or do you expect some destocking to take place?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Hi, Jeff, it's John. Typically, for suppliers in this part of the food chain critical subsystems, we tend to overperform during the ramps, and we tend to underperform when the ramps turn. And so that's really a question of when you think the ramp -- the thing will turn. And I know there's a lot of talk about people trying to call the peak right now, which we're not going to. I would say though that we're still very confident in our long-term model, as we talked about at Analyst Day which is our historic 200 basis points above WFE CAGR over the long term. And so that model is still very much intact.

Jeffrey Rand -- Deutsche Bank -- Analyst

Great. And just as my follow-up. Gross margins were close to the midpoint of guidance on it -- but -- on the strong revenue beat. Can you discuss how you think about the opportunity for margin expansion as you grow revenue over time?

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. Jeff, it's Seth. So, clearly volume is the bigger driver and again 50% flow through is our model and well intact. So that's a bigger driver going forward. Obviously, I think when the COVID-19 pandemic eases up, we'll have a little bit of tailwind there on margins just because the protocols would be relaxed a little bit is our belief. And then we do have some trade friction within the run rate. So if that was to move differently going forward that will be slightly helpful as well.

And then on the long-term, we do look at product development activities and our roadmap is to deliver products in the long-term that have higher value for customers and that should have an impact, obviously, on gross margin with the cadence we have across all three divisions on a regular basis. And that's sort of the ongoing, again, process, which will help margins going forward.

And then we do have a team, a widespread team in place to look at profitability improvements. So that's always something we do on a regular basis as well. So it's really multiple levers, Jeff, we've always been pulling. We're working pretty hard on all those right now. But in the short-term, I'd tell investors, the margin impact is really that 50% flow through on revenue. So that's kind of how I look at the margin growth going forward, the biggest lever.

Jeffrey Rand -- Deutsche Bank -- Analyst

Great. Thank you.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah.

Operator

Our next question comes from Mark Miller with The Benchmark Company.

Mark Miller -- Benchmark Company -- Analyst

Congratulations on another very strong quarter. So I was just wondering in terms of design wins, any notable design wins besides in the Power area?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Mark, it's John. So we have several in our portfolio of Semiconductor, other products, so pressure, flow valves, as well as remote plasma source of reactive gases. So there are multiple design wins there. As we talked about in 2020, we released 48% more products than we did in 2019 even during remote work protocol for many of our engineering teams. So not just Power, but the whole portfolio there. We also have design wins in our world-class optics efforts, as well as in lasers. So we're pretty happy with our design win activities across the portfolio. Obviously, we talked about ESI in terms of HDI, and there certainly -- we've certainly also maintained share in our leading flex drilling tool as well.

Mark Miller -- Benchmark Company -- Analyst

And the laser design wins, were these nanosecond lasers?

John T. C. Lee -- President and Chief Executive Officer

Both. Both nanosecond and picosecond.

Mark Miller -- Benchmark Company -- Analyst

Okay. Final question. Margins were up significantly sequentially year-over-year. Besides higher sales, what was driving it? Was it a mixed improvement?

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Mark, volume is definitely, again, a bigger driver, I would say. Then if you look at our cost structure, we do a pretty good job maintaining pretty disciplined cost structure in that ramp environment. Higher variable comp in '20, obviously, because of a record results. But fundamentally, that's kind of what we did in 2020, more the volume piece, maintaining good cost controls and strong execution.

Mark Miller -- Benchmark Company -- Analyst

Thank you.

John T. C. Lee -- President and Chief Executive Officer

Yeah. Thanks, Mark.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Mark.

Operator

Our next question comes from Joe Quatrochi with Wells Fargo.

Joseph Quatrochi -- Wells Fargo Securities -- Analyst

Yeah. Thanks for taking the question. On the Semi side, some of your customers have been continuing to increase inventory to support the stronger demand, but they've also been talking about building some buffer inventory just given the supply chain disruptions. I was curious, do you have any kind of visibility into that across your customer base?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Joe, it's John. I don't think we have a broad view of it. We certainly have certain product lines where -- and certain customers where they have asked us to do that and we have done that because that's their plan. So it's a customer-specific and probably product-specific kind of inventory, safety inventory, if you will. So it's really not a broad-based thing, but customer-specific or product-specific.

Joseph Quatrochi -- Wells Fargo Securities -- Analyst

Okay. That's helpful. And then on the strong E&S results this quarter, was that reflective of any of the 80 unit CapStone order that you got early in December, or is that still kind of more ahead of us in the guide?

John T. C. Lee -- President and Chief Executive Officer

Yeah. I would say that 80 unit order, the majority of it was not shipped in Q4.

Joseph Quatrochi -- Wells Fargo Securities -- Analyst

Helpful. Thank you.

Operator

Our next question comes from Tom Diffely with D.A. Davidson.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Yeah. Good morning. Thanks for taking the question. Hey, John, I was hoping to get a little bit more on the microelectronics part of the business. I know it's come back a bit recently. But what is your outlook for the year? And do you think your growth in that industry or that sector comes from share gains or is it going to be a recovery in the space that's going to be the biggest driver?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Tom, it's -- that's a good question. I think the majority is recovery in the space for sure. But as you know, our HDI momentum is good now. I think we're starting from a small base. So that's why my answer is that the recovery is probably from the larger flex and MLCC markets where we already have established leadership. But we hope that HDI will continue to accelerate, and at some point, it will be both.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. And do the HDI run on a similar cycle or is it a little bit off cycle versus the rest of the business?

John T. C. Lee -- President and Chief Executive Officer

I think, in general, it does run in the similar cycle. But HDI boards, as you know, are broader in terms of applications. They're not just tied to smartphones. Flex is still very tied to the iPhone and Samsung type phones, form factors. And it's also broadening as well, the use of flex. But HDI is broader. So it has a broader base of different kinds of applications.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. Thanks. That's helpful. And then, Seth, when you look at the tax rate, it looks like it's edging up a little bit here. Is there anything to read into that?

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

No. Tom, it should be at 18% in this guide, it's probably our view for 2021. I think in the fourth quarter, precisely, it was like 17.5% which -- versus 17% guidance. So, it's really around that zip code for sure. And it's really based on the mix of income by geography. So that's the only driver, frankly, on tax rate. But I think for modeling, so internally, we're using 18% for 2021.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. Thank you.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. Thank you, Tom.

John T. C. Lee -- President and Chief Executive Officer

Thanks, Tom.

Operator

Our next question comes from Amanda Scarnati with Citi.

Amanda Scarnati -- Citi Research -- Analyst

Hi, good morning. The first question I have is on the Advanced Markets side of the business. It looks like it's sort of accelerating off of the trough here. Is that the way to look at it, or is it more just sort of one-off ordering that you saw in the December quarter to drive that strong sequential growth?

John T. C. Lee -- President and Chief Executive Officer

Hi, Amanda. It's John. No, it's the latter -- sorry, it's the broader order patterns from multiple sub segments, most notably advanced electronics. So, well, I don't believe it's a one-off quarter kind of events as we guided in Q1, and as we said in the script, we expect to have even stronger Q1 in Advanced Markets.

Amanda Scarnati -- Citi Research -- Analyst

Great. And then on the HCI order that you saw in the quarter, remember last quarter you talked about having some new inquiries that were sort of unexpected. Was this order driven off of that or is this something in addition to sort of the inquiries that you were seeing earlier in the year?

John T. C. Lee -- President and Chief Executive Officer

Our reference to inquiries coming in a little earlier than we thought was really more about flex, Amanda. So -- and then you saw the -- our Q4 being a lot higher than normal seasonality. So it was really driven by flex, those inquiries.

Amanda Scarnati -- Citi Research -- Analyst

Perfect. Thank you.

John T. C. Lee -- President and Chief Executive Officer

Thank you, Amanda.

Operator

[Operator Instructions] Our next question is a follow-up question from Jim Ricchiuti with Needham & Company.

James Ricchiuti -- Needham & Company, LLC -- Analyst

Yeah. I just wanted to go back to the L&M business, particularly the non-Semi portion of that business. And I'm wondering where would you say we are with respect to pre-pandemic levels of demand in some of the major verticals?

John T. C. Lee -- President and Chief Executive Officer

Yeah. Jim, it's a good question. I think we're still -- we still have the trade friction headwinds. So that was pre -- that was before the pandemic. And then the pandemic added even more headwinds as you could say. So I think the pandemic headwinds are kind of gone now. The trade headwinds are still there and things hopefully will normalize over time. But that's kind of how we're viewing this final return to growth, organic growth.

James Ricchiuti -- Needham & Company, LLC -- Analyst

Got it. And, John, on the E&S side of the business, clearly a little change here in the seasonal patterns of demand. And I'm wondering how we should think about flex demand -- the flex drilling demand as it relates to the normal seasonality you see in the business? And then what's the outlook for this recovery in the MLCC business? What are you hearing from some of the customers there? Is that near-term outlook still pretty strong?

John T. C. Lee -- President and Chief Executive Officer

Yeah. The MLCC, our near-term outlook, I'll take that one. It does still seem to be strong. It's -- it seems to be strong for -- has been strong and we believe it will continue to be strong for at least end of the quarter as far as we can see. And I think the seasonal pull-in, if you will, I think your question is a flex a pull-in or is it just additive. And from what we can tell now, because of the bookings and activities we see in Q1 and Q2, that's the normal activity and we still see that. And so Q4 seems to be in an additive quarter to what is normally a Q1, Q2 high quarters for the E&S flex business.

James Ricchiuti -- Needham & Company, LLC -- Analyst

Got it. That's helpful. Thank you, and congrats on the quarter, guys.

John T. C. Lee -- President and Chief Executive Officer

Yeah. Thanks, Jim.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Jim.

Operator

Our next question is a follow-up question from Tom Diffely with D.A. Davidson.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Yeah. Hello, again. Just a quick clarification. Did you say you had over 200 patents issued in the year?

John T. C. Lee -- President and Chief Executive Officer

170, Tom.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

170. Okay. And then which segment are those concentrated in?

John T. C. Lee -- President and Chief Executive Officer

It's pretty broad. I would say we have so many products. We have a fair number of pressure products, valve products, RPS products and power products, and then you have the entire array of products in Light & Motion, so optics, lasers, photonics. So it's really pretty broad based. And we have a pretty rigid and good patent processing in terms of value winning, whether the things are worth happening or not. That goes across all the divisions. E&S had some patents too. But those are really a little fewer in terms of the number, because those are mostly system integration type of ideas.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. And maybe just on that, when you look at your R&D spending for the upcoming year, are there particular focuses that you have, or are you going to be pretty broad-based across all your markets spending in R&D as well?

John T. C. Lee -- President and Chief Executive Officer

Yeah. I think we've talked about in past too, Tom. We are very targeted in terms of where we put our R&D dollars. We always look at areas for growth, opportunities for growth. And so, for us, we will invest in all the products appropriately, but the areas where we are investing for future growth are power, world-class optics to address that, and lasers, and HDI.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

I'd say too, Tom, if you look at our -- we're not guiding for full year obviously, but if you will -- internally, we are leaning pretty heavy in the R&D spending in 2021. So the majority of our spending increases in OpEx will be heavily geared toward R&D efforts. And we see a lot of opportunity there for sure.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. Thank you for your time.

John T. C. Lee -- President and Chief Executive Officer

Yeah. Thanks, Tom.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.

David Ryzhik -- Vice President of Investor Relations

Thank you, Kevin. And thank you all for joining us today and for your interest in MKS. Operator, you may close the call.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

David Ryzhik -- Vice President of Investor Relations

John T. C. Lee -- President and Chief Executive Officer

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

James Ricchiuti -- Needham & Company, LLC -- Analyst

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Stephen -- Cowen & Co. -- Analyst

Jeffrey Rand -- Deutsche Bank -- Analyst

Mark Miller -- Benchmark Company -- Analyst

Joseph Quatrochi -- Wells Fargo Securities -- Analyst

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Amanda Scarnati -- Citi Research -- Analyst

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